Q.P and Q are partners. R is admitted as a new partner and brings his share of goodwill in cash. How is this amount treated in the books of the firm?

The cash a new partner brings in for goodwill is not a reward the firm itself keeps — it exists specifically to compensate the old partners for the share of future profits, and the goodwill behind it, that they are giving up to make room for the new partner. …

When a new partner is admitted, they will from then on share in profits that the firm's existing goodwill helps generate — a reputation the old partners built before the new partner joined. To compensate the old partners fairly for the portion of future profits (and goodwill) they are giving up, the new partner's premium for goodwill, once brought in as cash, is credited to the old partners' capital accounts in their sacrificing ratio — the ratio in which each old partner's profit share has reduced because of the admission. …

A very common mistake is crediting the goodwill brought in by the new partner to all partners (including the new partner) in the new profit-sharing ratio. The amount belongs only to the OLD partne …